Exuberant investors send stock indexes higher

Specialists David Haubner, left, and Anthony Rinaldi work on the floor of the New York Stock Exchange on Monday, a record day for the stock market. ﻿

Specialists David Haubner, left, and Anthony Rinaldi work on the...

Two weeks after Donald Trump swept to a surprising electoral victory, investors from around the world are betting that tax cuts, less regulation and a spendthrift federal government can recharge the U.S. economy.

This burst of exuberance, whose momentum has shown few signs of slowing, has resulted in significant flows of money being poured into U.S. stocks - sending the major market measures to record highs on Monday - as investors pull out of government bond funds with miserly yields.

The Organization of the Petroleum Exporting Countries has agreed on the outlines of a deal to reduce production in an attempt to support oil prices, which are still far lower than they were two years ago. That would in turn lift energy company profits.

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OPEC representatives will meet in Vienna on Nov. 30. Quincy Krosby, market strategist at Prudential Financial, said investors are encouraged by the effort, but she doesn't think a deal, if one happens, will do much to lead to sustainably higher oil prices.

"There's nothing to suggest the agreement's going to hold," she said. "When all is said and done, supply and demand will ultimately dictate the price."

Two weeks is a short period of time in Wall Street investment cycles, but the current wave of enthusiasm recalls the early days of Ronald Reagan after his election in 1980, when investors around the world embraced his sunny view of American business potential.

"This is just like Reagan," said Arthur Laffer, an economist who evangelizes for lower taxes, who advised Reagan on economic policy and is doing the same with Trump. "We cut the highest corporate tax rate from 36 percent to 25 percent. Once this thing starts, you will see people piling on and the prosperity will blow you away."

Laffer said little about the budget deficits and the surge in debt that resulted from these Reagan-era policies. But his ebullience was none the less instructive, as it mirrored the mood in the markets as investors chose to set aside gloomier notions and bet instead on a jamboree in stocks that will - they hope - be supported by a Trump-style economic boom.

On Monday, four major measures of the stock market reached record highs as investors cheered a weekend of the president-elect acting like a man with a mission.

The benchmark Standard & Poor's 500 index is now up about 3 percent since Trump's victory.

It was the first time since Dec. 31, 1999, when stocks were still enjoying the dot-com boom, that the Dow Jones industrial average, the S&P 500, the Nasdaq and the Russell 2000, a benchmark of companies with smaller market values, reached highs on the same day, according to Ryan Detrick, a senior market strategist with LPL Financial.

When it comes to market rallies, however, Trump has a way to go to match the record of the man currently in the White House. The S&P 500 rose 84.5 percent during President Barack Obama's first term. If the markets were to match that gain during a Trump administration, the S&P would have to be over 4,000 by late January 2021, according to Standard & Poor's Global Market Intelligence.

The Obama stock market boom was fueled by an unprecedented period of central bank activism in the years after the 2008 financial crisis. Central bankers around the world flooded markets with easy liquidity that flowed into every type of financial asset.

With interest rates on the rise and inflation picking up, central banks are now in retreat. That means that the Trump administration will need fiscal policy - government spending and tax cuts - to take the baton from its monetary cousin.

The recent euphoria stands in sharp contrast to Wall Street's earlier prediction of market mayhem if Trump were to win. The view then was that his unpredictable ways would spook the financial world, not least his threat to rip up trade agreements with Mexico and fight China on its exports to the United States.

After a sharp but brief slide in Asian trading on election night, when it became clear that Trump would win, markets rallied quickly as the Trump economic agenda was quickly assessed.

At the root of the reappraisal, economists and investors contend, is the view that GOP control of the Senate and House, as well as the White House, will put an end to the divisive politics of the Obama years that prevented the administration from taking a more proactive stance in stimulating the economy.

Moreover, political analysts point to the fact that while Democrats have been criticizing the president-elect on many fronts, on the one subject investors have rallied around the most - infrastructure spending - there has been broad agreement with the president.

As optimism spreads about Trump's economic agenda, investors are pulling out of their bond funds and buying stocks that benefit when the economy turns around, like commercial banks.

"Investors are experiencing what I call FOMO - fear of missing out," said Sam Stovall, chief investment strategist at the research firm CFRA. "They are playing catch-up."

While he describes the recent run as impressive, he also points out that potential disappointments are lurking.

"This will be more of a challenge than people are now thinking," Stovall said, referring to the high hopes for infrastructure spending. "The Republican Congress is still relatively conservative, so for every dollar of spending they will be asking for cutbacks, because our debt is already approaching 100 percent of GDP."